While as the middle child I strive to differentiate myself, I never resort to joining fads like planking, Tebowing, and buying multifamily properties in New York City. In regards to the latter, the lure of a stable income stream in a high-occupancy market is undeniable – but not when you have to pay 4 and 5 handles.

As numerous NYC commercial real estate investors have acidly observed, net operating income growth is highly unlikely to be sufficient to make these investments financially successful. Chris Nolan of CRT Capital Group writes, “Property rental revenues over the last few years have not kept up with increases in municipal taxes and fees, which are growing at a double-digit annual pace. This has resulted in declining property free cash flows.”

Eerily reminiscent of the 2005-2007 bubble, low interest rates are sustaining higher asset valuations. Commercial real estate broker Robert Knakal of Massey Knakal recently stated that “a 200bps rise in rates would cause the proverbial ‘blood in the streets’ with rising volumes of properties in distress.”

Significant cash flow growth is needed to offset the negative impact on valuation caused by rising cap rates. Assume an asset has NOI of $100,000 a year, and sells at a 5% cap for $2,000,000. If the capitalization rate in subsequent years is 7%, with no change in NOI, then the market price would be $1,420,000, a decline of 29%. The NOI must grow at 7% annually for five years to offset this 200bps increase in the cap rate.